Home Loan Myths That You Need to Understand
These Home Loan Myths Can Be Powerfully Discouraging. They Are Just Popular Misconceptions about Mortgages, and Easily Debunked. Don’t Let Them Keep You Out of a Home.
Home Loan Myths
Getting a mortgage can be scary, but there are a number of home loan myths you should understand and know not to let frighten you. These myths are the kind of misunderstandings that make people believe that they can’t qualify for a mortgage or get into the right home for them, that lead them to take loans from predatory lenders instead of reliable banks, and that induce them to make poor financial decisions. Don’t let yourself fall prey to misinformation.
Evaluating Mortgage Options by the Numbers
Most importantly, comparing mortgages is complex but entirely doable. There are a range of related misconceptions that “the best mortgages have the lowest monthly payments” or “the lowest up-front costs” or “the lowest interest rates” or “the lowest APR.” The reality is that none of these are the end-all metric to compare mortgage options. It’s important to understand all of these numbers and compare them as a whole package to identify the best mortgage for your budget and financial situation.
A low APR tells you that over the life of the loan, the average interest rate is lower. This is a good rubric to understand your interest rate options, but if you anticipate changing finances in the future, you might be better off with some other loan that changes and will fit your current situation better, even if this results in a higher average over the long term.
A lower interest rate is generally better, especially with fixed-rate mortgages, but it’s just one of many variables. Generally, the lower your interest rate, the more discount points the loan will have. This is a complex way of saying that mortgages with lower rates usually come with higher fees at signing, and these fees are measured as a percentage of the value of the mortgage, hence the name points. Lower upfront costs, especially at the lowest amounts, are usually accompanied by higher rates and higher costs over the lifetime of the mortgage.
Each of these numbers tells you something important about the loan, but you need to put them all together to get a complete picture that lets you identify the best loan.
Mortgage Types and Costs
Some people believe that there is a flat-out “best” type of loan, and most of the time they think it’s a 30-year-fixed-rate mortgage. Fixed rate mortgages are more reliable, especially if you know you’re going to be in the house for the life of the mortgage and your financial situation will not change very much. However, this doesn’t mean that young home-buyers who may have growing families and changing home needs in the future have to get a 30-year-fixed. In fact, some experts even think that these upwardly mobile borrowers are better served by an adjustable rate mortgage because they can pay less now before moving on to a bigger home when they have higher earnings.
There is a lot of confusion about how to pay off a mortgage. It is neither true that you should try to pay off a mortgage as fast as possible, nor that you bank doesn’t want you to pay it off early. You have a fair amount of flexibility about paying your mortgage, as long as you keep up with your monthly payments.
The advantage of paying a mortgage off earlier is obviously paying less in interest because you are servicing the loan payments for fewer months. Reputable banks have no problem with this because it means they’ll be able to make a new loan to a different borrower and college a whole new set of mortgage contract fees. On the other hand, paying off early isn’t always the right decision. Especially if your mortgage is recent, you may have a very low interest rate. You should examine your finances and consider your other options, such as paying off costlier debt or using the money to invest and continue to enjoy the benefits of deducting interest from your income to pay less in taxes.
When you look at mortgage options, remember that as long as you meet the minimum payment, any choice to pay off faster or not should be entirely yours.
Qualifying for an Affordable Mortgage
Lots of people fear that they can’t qualify for a mortgage, or for a decent mortgage, or for a mortgage from a reputable bank. Some are generally afraid that all lenders are predators – only the dishonest ones are. The main motivations for these fears about not qualifying for an acceptable mortgage stem from less-than-perfect credit and concerns about the down payment.
Even if you can’t afford to put 20% or 10% down, you can still qualify for a reasonable loan from a reputable bank. It’s important to understand that even if you can only save up 5% for a down payment on a home, you can still find a lender that will give you a manageable rate and help you get into a house. It might cost you more in the future in terms of higher payments, but as long as you do the math and can afford the payments, there’s no reason to think that lacking a large down payment will keep you from a mortgage and home ownership. The same is true for poor credit. Blemishes don’t make mortgages impossible, they just might make it more expensive. If you have time to improve your credit score, of course you should do so. But you shouldn’t let fear of a bad credit score keep you from looking for a mortgage.
These common myths are not just false, they’re damaging. A mortgage is the surest route to home ownership. Don’t let these home loan myths get into your head and discourage you from taking out a mortgage so you can move into your home.